Plummeting Prices

In less than a year, average prices of crude oil in the United States have nearly halved: oil that was nearly $90 per barrel in early January 2014 is now around $50 per barrel, and signs of leveling off remain elusive. Concurrently, average prices of gasoline have fallen to around $2 per gallon in most states in the United States, with 13 states reporting prices under $2. This parallel drop in prices is intuitive as gasoline is a fuel derivative of crude oil, meaning that it is the product of crude oil refineries. As explored in a previous Sense and Sustainability article by Samuel Beirne, falling prices have already had telling implications on the automobile industry. But how do the impacts of this drop manifest economically on the national and global scales?

Nationally speaking, economists find that both the causes and effects of the recent price declines are economically beneficial for United States citizens. Looking first at causes, some find that a simple supply-demand relationship may offer an explanation. As supply and demand for crude oil fluctuate in response to changes in economic condition—be it a decline in demand due to a recession, or a rise due to other factors—prices fluctuate in response. Many US economists originally worried that the oil price decline was due to decreased demand from slowed economic growth in the country, however this is now considered unlikely as US gross domestic product has generally shown positive growth over the last year.

Rather, economists have deemed that an increase in oil supply is the driver of the observed price drop. Specifically, the 80% increase in US shale oil production since 2008 as well as the anticipation of further production increases are the largest factors in the price declines. This surge in domestic supply is largely driven by significant increases in build-out capacity and milestones in oil rig efficiencies. Taken altogether, this has resulted in significant reduction of the nation’s dependence on foreign energy.

As history shows, prices of gasoline project their volatility upon consumers. One article noted that in 2012, when prices reached a high of $4 per gallon in California, some citizens resorted to stealing substantial quantities of gasoline as the commodity became more and more valuable. Currently, as gas prices are falling, discretionary cash is on the rise as and so consumers have more in-pocket money to save or spend on other goods, a particularly meaningful trend during the holiday season. As a result, US citizens celebrate on social media as “#gasprices” achieves a popularity on the scale of a meme.

Thus far, this article has focused on the United States, with domestic reasons for the decline in prices, and its citizens as reaping the benefits. But, again, given the complex and multifaceted nature of oil pricing, many analysts find that this decline in price is a more mixed basket of news internationally, and that political factors may carry the most weight in assessing the causes of the decline.

When oil prices fell below $70 per barrel in late 2014, members of the Organization of Petroleum Exporting Countries (OPEC) strategically decided not to decrease production. Their logic was that this prolonged increased supply would continue to drive global prices down. As the cost of producing oil in the US is relatively high compared to the cost in OPEC countries, this was an attempt to render production in the US unsustainably expensive and thus maintain OPEC’s control over the global oil market. While wealthier oil-producing countries may have the resources to “wait out” these low prices and accept the short-term economic losses, poorer OPEC countries, such as Venezuela, Iran, and Iraq, may not have this option. Additionally, dents in the revenues of oil exporting countries in Europe and Russia, an oil giant, could mean that these countries may not feel the benefits of a strengthening U.S. dollar.

So, as we smile at the pump, other citizens around the world may groan. But with some consensus that prices may stay low for several years, is there more to the discussion than current economic pushes and pulls? Although lower prices could also make it less economically viable to extract oil from unconventional reserves, increased consumption of oil and other goods in wealthier countries like the U.S. could drive up carbon emissions, worsening the drivers of climate change. With worsened climate change comes a greater economic cost in the future to countries all over the world. And even if these increased emissions are negligible, the mere framing of lower prices as an economic “good” indicates an unfortunate shortsightedness in how we view our ability to spend more freely.

As one expert stated after lower oil prices in the 1980s slowed policy to control oil consumption, “climate change policy rarely happens on its own It needs a considerable amount of pressure, stemming from dire economic and security issues, to materialize. Lower gas prices are unlikely to increase pressure on policy makers to reduce our dependence on oil and corresponding emissions. So as countries battle market share in the ever-changing oil market, they ignore the undeniable cost fossil fuels pose to future generations in all nations.

An undergraduate at Harvard College, Jahred studies Environmental Science and Engineering. He is most interested in climate change and the human-environment interaction, on both social and scientific levels.